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"Mark to Market" ….It Continues

A follow-up to my recent post.

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Tradefast Says:

To my point- it isn’t just the market for stocks and snow shovels which exhbit cyclical/predictable patterns. These patterns are also apparent in the market for physical business assets – plant and equipment.

Pick a major steel company, a paper company, a chemical company (without loss of generality)- if the company had to dispose of all their plants at the bid side of today’s market, would any of these companies be solvent. Why? Because the bid/ask spread for these physical assets is exceedingly wide in a recession. If you marked all of U.S. Steel’s assets to the price where they can sell a marginal ton of capacity, X would be bankrupt. Fortunately, X is under no pressure to liquidate assets – so we can all play along with the assumption that the company is solvent, with a very substantial net worth.

Ah, but what about the banks? No such benefit of the doubt is given to banks. We assume that if a bank has assets with a wide bid/ask, the bank must be camoflauging the fact that they are insolvent and most of their assets are ‘toxic’. The market is broken, illiquidity premiums are enormous, bid/ask spreads on bank assets are in disequilibrium, and mark-to-market account rules need to be repealed, ASAP. I expect the accounting rules to change, probably within a week.

My two cents:
There have been rumors all week that some repeal of it is in the works. Not a full reversal of the policy, but one that deals with illiquid securities that essentially have no market. When forced to liquidate, the seller takes whatever the buyer offers. That then sets the market for all other securities held by all whether they need to sell or not.

In its basic essence, mark to market empowers to weakest holder of securities to set the value of the strongest’s, thus dragging down the whole system to its level. That is not what capitalism is about. The strong are supposed to survive and prosper while the weak fall by themselves to the wayside.

What has happened now is the weak, far from falling by the wayside have become a massive anchor on the whole system……..not good.

Disclosure (“none” means no position):

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